Money, as a long-term source for business, comes in broadly two forms:
(a) Equity & (b) Long term Debt .

The form (a) brings comfort and smartness in the business whereas form (b) comes as a load. Both have to be serviced and both appear on the left side of the Balance Sheet (traditional form of Balance Sheet). Surprisingly, despite Equity being costlier to service as compared to Debt Servicing, the former is done cheerfully whereas the latter is treated as a burden. Ever imagined why so?

Equity money is Growth capital. It comes with brain – the smart money as they say, that promotes Entrepreneurship & business. No business gets created without Equity. It is this money that flows first and then follows the debt – never the reverse order. It is the Equity money which gives birth to any Enterprise – Debt money only follows.

Why there is unemployment & Why private investment is not picking up?…. Now if the Government of the day is serious about it and wishes to promote private investment, it has to encourage Equity culture in the economy. Is it doing so? I have my serious doubts. Let us dive a bit deeper.

1. To promote Equity savings instead of Debt savings, there has to be some fiscal advantages to promote Equity or some dis-incentive to accumulate Debt Savings. How can this be achieved? Well, at least not by introducing Long Term Capital gain tax or by taxing the Dividend (which is so bad in law). Instead, the Government should travel one step forward by abolishing all forms of taxation on Gains out of Equity investments. In any case, gains on Equity markets are not a part of the GDP, then why tax them.

Imagine the kind of Equity investment flow (Risk capital) that will occur, thereby kick-starting private Investment.

2. Disincentives Debt savings. Tax the Interest income severely (one can look at giving exemption to senior people). I have seen young generation surviving on interest income from funds bequeathed to them by their parents / grandparents. They should be taxed at penal rates. These are people who slowly become rent seekers making the money “DUD” and removing the smartness from it. Even “Islam” preaches not to earn interest and terms it as “Haram earnings”. Why can’t the present economists & policy makers borrow something from these holy books and figure out a good solution – if they can’t think o their own.

3. Simpler way might be to reduce the interest rates on Debt Savings. If the constitution doesn’t allow banning it, or taxing it at penal rates – simply reduce the bank rates in the economy. Look around in developed economies. Analyze the difference between the prevailing 10-year benchmark yields and the yields from Equity markets. The latter would be easily 8-10x of the former. Why then India still hovers around 2x (the ratio of Equity yield to Debt yield). Why can’t India reduce the Interest rates / bank rates drastically? The reason – our credit policy makers. They are learned people, but as they say, most of the learned people are fearful. We will have the Credit Policy makers screaming that cheap money might lead into hyperinflation, chaotic economic crisis, flight of dollars back etc?….They might have a merit, but even Demonitization was opposed by such bankers. We see the fruits of it now with increased number of tax payers etc. I find all such fears more as hoax or maybe temporary bumps…

4. Let us deliberate on what could happen and maybe start a discussion so that it reaches the policy makers doorsteps…

We might look at the following therefore..

a) The inflation might rise momentarily but once the supply side is taken care (after good private investments that will happen) – this inflation will settle down. Time-lag between new investments and its supplies might be a temporary hurt-period.

b) The reduction in interest rates might jack up the price of INRUSD pair but it will serve as a good natural protection to the domestic industry and a big push to the make-in-India program. Thereby generating employment. Once this pair (INRUSD) rate settles – it will be business as usual. In-between certain importing industries might take time to settle.

c) With reduction in domestic interest rates – the private industry will become more competitive in international markets and will look forward to expanding and increasing capacities further promoting private investments.

d) Reduced interest rates will promote internal consumption which will further fire the domestic demand & subsequent production.

e) Regarding flight of Dollars – we have enough chest now with us – that such surgical strikes can be withstood. And what if the public has to sacrifice on Oil consumption / or any import consumption. As a nation, we should have belief in ourselves that we will not only survive, but stand up and run. The difference this time – that it would be on our own national pride.

5. I also carry a slight confusion on this so called WPI index and would like to questions on its constituents even. It is this figure that is feared by our Central banker to soar when cheap money is available and might dent into the Gross GDP number. I feel we as proud citizens of this nation – should deliberate on this number and question on how it is derived. It could be incorrect and favoring some interested parties not aligned with national interest.

Over the years, the Indian population has been pushed into living life that mimics western way of living. This could have been ill advised to them as signaling an improvement in standard of living consequently few items participate in the index formation. Not that most of it is wrong – but few might be done away with by adopting a frugal lifestyle in sync with the natural environment of the local geography rather than imitating the outside culture. This should be the next PM talk to masses – maybe, to invoke the nationalist feeling within the masses and to shun away goods that are not necessary but a load on foreign exchange. I am sure the real WPI (items necessary for a good Indian living) could be slowly adopted that could boost the local industries.

6. The following steps if taken by policy makers should yield the necessary private investments and the employment generation required by this young population…

a. To remove all Capital gains on incomes from Equity savings – to promote equity culture and strong inflow of Growth capital for private enterprise.

b. To introduce fiscal advantages for Equity savings and Dis-incentivize Debt savings…. (please note that I haven’t undermined the importance of savings)

c. To accelerate the reduction in Interest rates prevalent in the economy so as to make the Equity earnings almost 5X of the Debt earnings and only increase this difference from thereon.

d. To allow the INRUSD pair appreciate because of above steps, and to ensure that this rise is smoothened instead of showing spiked movements.

e. To speak to masses – direct dialogue with public (PM Mann-ki-baath etc) and request them to adopt frugal standards of living. To handle this shift in a peaceful way – as the step of GST was handled.

Let us debate and share this thought – so that it at least starts a chain-reaction reaching the right people and forcing them to think for some plausible surgical solution.

In the last decade and half into my investing life, I have come strongly to believe that B2C businesses are the only ones which can deliver super-normal returns over a longer time frame. It might be known to much of the investing fraternity, however sometimes people have to travel themselves to realize the deeper secrets. Various reasons that push me to think favorably for B2C companies. Some of them are explicit like mentioned below:

Natural Moat
Companies over time, in B2C space create brand equity, recall value and customer loyalty. Such attributes are pretty hard to break for a new entrant. In such scenario, costing of the product takes a back seat. Quality & Positioning of the product becomes an important aspect. If the company or the product keeps that creativity intact – it has only one way to move and that is “going UP”. Moreover, “Creativity” in itself is an infinite space to work with – with loads of outsourcing agencies available.
Whereas in B2B businesses – the reduction in costing is the only secret to survival. “Cost Cutting” is not an infinite area unlike creativity as mentioned above. Every-time that you are able to find ways of reducing product costs, the space for further improvement only shrinks that much. And with every such step of Product cost reduction – one lands up creating a new benchmark for self to be broken alongside “shrinking” ways to do so. This becomes a cascading phenomenon and at some point, in future, it peaks-out and the company starts going south.
PE expansion
Market capitalization of companies grow because of two reasons – Growth in bottom-line and expansion in Price-Earnings multiples.
When B2C businesses grow – their Price to earnings multiple also expands. This is unlike the B2B businesses which have static PE multiples and their market cap grows only with expansion in Bottom-line. Which means for every similar basis points of Bottom-line growth – the B2C business accelerates vis-à-vis a B2B business. This when compounded throws a massive difference over time. And why we say time – because B2C businesses survive more as compared to B2B businesses which get caught in the cascading vicious phenomenon as mentioned earlier.
Brand Leveraging
B2C businesses also have another big advantage of leveraging their “Brand” value into adding new revenue streams thereby generating more income. And all this income is purely asset light further adding to the Return on Capital employed. We have seen this happening all across – be it Tommy Hilfiger, TanisQ, Titan etc…
B2B – don’t have this inherent advantage and can only work towards increasing capacities to reduce costs an asset heavy method of churning profits.
Asset light model
B2C businesses can slowly upgrade themselves towards asset light model which a typical B2B can’t. And with turning Asset-Light – the Margins expand. Such expansions are suitably rewarded in accelerated mode by way of PE expansions as explained earlier – a Double Impact – and so the huge PE multiples to growing B2C companies.
Due to the Asset-light model – the ROCE improves drastically for B2C companies further enhancing their Market capitalization and reach.
With being Asset-light, pivoting into newer areas is a lot easier v/s an asset heavy business – improving the chances of survival more.
Growth Capital
For established B2C companies – raising resources either from Debt markets or Equity markets is not only easier but also rewarding vis-à-vis B2B companies. This fund-raising is done at premium valuations due to increased PE multiples – resulting into less dilution of Equity for more money. Whereas the same logic works exactly the reverse way in case of B2B companies – which are Asset heavy and work on book value concept.
The above reasoning means – shareholders of a B2C companies create a separate/exclusive league of their own and charge premium for any new entrant (read new shareholder). Such inherent rewards of on-board equity holders vis-à-vis the new entrants in a B2C company is suitably captured in Higher PE valuations for such businesses. A virtuous cycle for B2C v/s B2B.
Product innovation
Innovations & Inventions are always a disruption to established players. B2C businesses do have a fair degree of risks with new products taking over their established turf. But this risk remains equally true even for B2B businesses.
So, with the same degree of risks (if you ask me it is more for a B2B business v/s B2C) – the rewards are far higher for an established B2C business – if it survives.
Sunken cost
Advertisement / Product promotion is the only bane for a B2C company and this could turn out to be sunken cost vis-à-vis any B2B company which might be asset heavy.
But later in life when the businesses mature – the same reasoning goes against a B2B company. Assume if, both the businesses have to go out of league – then B2C might still carry a terminal value in terms of “Brand” whereas the B2B will only have a depreciated outdated equipment worth scrap.
However, the caveat to such investing is – B2C businesses have high infant mortality rates and so investing in them can make sense if done when the business matures. But by then, the premium gets captured and chances of making money reduces equally. So, either you have the expertise to catch such businesses young or the second option is a take a SIP route of investing in such matured companies. The second option will still give you returns to beat the inflation big time.

Happy investing…

The definition of “Loan Waiver” and “Loan Write-off” may be different in dictionary – but both are technically the same. Both are bad for an economy, however they are perceived pretty differently by the common man. The first one is a Pro-active action taken by the Govt based on electoral promises to garner votes, whereas the other one is forced on the State machinery and is reactionary in nature. Unfortunately, the first one is considered “sacrosanct” and a benevolent step by any political party, whereas, the other one is considered unhealthy development and criminal in nature. Is it not surprising?

If someone were to ask any learned economists, s/he would opine that both steps are extremely bad, and if someone were to dive deeper – s/he would suggest that the first one takes is more ruinous for its “After effects” on the economy. Then how come, our policy makers don’t understand – Well they are servants of their political masters and seem to have decided to follow the path of Gandhism..

“Everyone wants to live on the expense of the State whereas the State lives on the expense of everyone” – brilliantly put across by Mr. Frederic Bastiat, but hardly understood by our policy makers and state heads.

Let us try to understand this a little –

#“Loan Waivers” are an incentive to Default – (this statement itself is standing inverted if seen Logically). It also gives legal sanctity to frustrate & murder the idea of being an honest borrower – a retrograde principle in economic growth. Such waivers over time, become entitlements, further prompting good borrowers to turn bad. A complete failure of Economic logic at the basic level.

“Loan Write-offs” – though bad, are not entitlements but are forced upon the system due to non-recovery. Such write-offs are not entitlements. They also have penal provisions on the defaulting borrower as per the law of the land – which some might argue to be unrealistic in Indian context, but Rules around such defaults are only becoming stricter & stronger by the day.

How does the law, then not criminalize the first one, namely the “Loan Waiver” – at least equally as Loan write-offs? Why does the system see both with different set of eyes? Why does the Judiciary remain silent on this insane step widely used by almost every political party to garner votes? Such “Loan Waivers” are no different than “Loan Defaults” done by the likes of Mallya’s & Modi’s – then why aren’t these policy makers / heads of the state who conveniently announce such waivers be brought to books? Greed to power is so much ingrained in our politicians that they simply refuse to see beyond their term of power on the disaster unfolding over the economy due to such steps. And the most intelligent bureaucrats / the policy makers also seem to conveniently throw their own sense of wisdom out of the window – showing their utmost loyalties to their political masters..After all the funds of the nation are scarce and can’t be blundered like this.. Some one has to take the responsibility.

And all sympathies go towards the tax payer of this country – the mere 2% of the population which has to foot the bill for such insane steps. The citizens need to wake up and raise their concern before such steps become the order of the day..

May God Bless India….(and save from such greedy politicians)…

#Cryptocurrency as a concept has been making lot of noise across the world. Some favoring its existence as a Giant step towards progress of Digital Economy and there are equal number of experts equating it to any other #Ponzi scheme. Loads of expert opinions & views are available on various business platforms / social media – and believe me, such opinions have only added to the confusion in the minds of general public.

Not getting drawn into the merits/demerits of this currency – least, that I get labelled as an expert – I am simply trying to drive another interesting aspect to the recent news of Thailand Government making this concept legal and framing rules around it. Such an economy, to my understanding moves into the “FMA club” – the first mover advantage club.

The Government of Thailand seems to be realizing this tangent benefit and taking the leap first. It has decided to overlook the demerits of Crypto-concept or have seriously worked around it to cap the pitfalls.

“The world belongs to the Risk-takers” – as they say and Thailand walks away with this award at the moment.

Let me explain the tangent benefit, as I understand it….

Assume an investor holding crypto to his/her account, wishes to convert this balance into the home-country currency and where the home-country does not recognize “Cryptos”. Such an individual might first swap the crypto in “Thai Baht” and then take the regular route to convert “Thai Baht” in his/her home-currency. It is a long route – though, and more taxing, but in the process, it has generated a demand for “Thai Baht”. Thailand keeps enjoying this moat till a stronger economy decides to accept this concept.

All the best “Thailand” for being the First mover….

How many times have you come across invitations of attending great management conventions or seminars on how to go about growing your business. I guess loads…! And invariably such lectures are from successful known entrepreneurs’ – big names of the business world. The much more of a bigger name – the larger the audience.

Friends, we are aware that all businesses face infinite variables in their life journey. If I have to broadly classify them – they would be of two categories:

a) Variables / reasons which take the business to the top &

b) Variables/ reasons that pull the business down.

When we hear lectures from successful entrepreneurs – we tend to listen to the variables marked (a)…whereas it would have been prudent to know variables marked (b) and avoid making mistakes. If businesses avoid making mistakes – they would survive longer only improving their chances of becoming successful.

What if I have to opine that all successful entrepreneurs actually adopted this technique of not doing the wrong things and therefore survived to become big. The same successful entrepreneurs, while in lecture mode – tend to talk about ways of doing things differently, what techniques to adopt which made them successful.…their list of “WHAT TO DO” might go on & on…(till someone from the host comes and says “Sir, time for the next speaker”). Nowhere do they say what is “NOT TO BE DONE”.…because frankly, they don’t know. It will be the unsuccessful person who has faced this music.

Better alternative therefore would be to call the #Unsuccessful entrepreneurs to lecture in such management conventions to deliver a talk on what pinned them down. It might be more useful for budding entrepreneurs. Unfortunately, no one wants to hear an Unsuccessful person. Which means we will keep hearing loads of lectures on management, growth etc and still keep seeing businesses fail. Nature’s rule of averaging on play…

So, friends, lets’ look out for sessions where the talk is delivered by unsuccessful entrepreneurs…It might genuinely help.

GDP – Gross Domestic Product, seems to be making lot of headlines in the media lately. It turns out that, this term has become the toast of political discussions and almost all the channels are debating relentlessly on who performed well on this matrix – was it #UPA or the present #NDA Govt. Never thought, that politicians will take over this term and use (misuse) it to slugfest each other without knowing the real meaning of this term. Leave aside these politicians, even the best #Economists sometimes suffer myopicism in analyzing GDP. I haven’t found anything ingenious – but Yeah! Surely something interesting to deliberate.

Let us first understand the basic meaning of Nominal GDP. It is a macroeconomic measure derived by adding all the monetary value of economic produce in an economy for a period between two points on the time-scale. This figure is adjusted for price changes (i.e., inflation or deflation) to arrive at the Real GDP number – reported commonly as #GDP. Inflation is the changes in prices in the period over same points on the time-scale.

Now, that we have understood how Inflation is a necessary ingredient to calculate Real GDP number, let me introduce another important term which, incidentally is known to the World leaders & thinkers, but very conveniently overlooked. But before that, let me take a tangent to understand this famous scientific Law – “The Law of conservation” . This law states that, Nothing in this universe gets created or destroyed – it simply changes forms. Should I infer that all this “GDP” that Nations chase, is nothing but converting one form (of natural resources) into another form (usable resource)? Oh yes! Does that mean, we as constituents of the economy are Converting things and not Producing them contrary to what we commonly thought? Yes again..!

If I were to pull a “Scientist” to explain the term GDP in the light of this famous law – the explanation would say that it should defined as the “Gross Conversion Ratio” rather than a production ratio. Now assume, we also have An Environmentalists on the panel. S/He would suggest that all this Conversion is happening at an environment cost. So before one calculates the “Real GDP” – please account for this cost also. How to measure this cost? Well simple, it could be measured by creating few yardsticks like Carbon foot-prints, green-house gasses, air quality etc. Differences in values between two set of points(same points as GDP calculation) on the time-scale be accounted for. This number could be positive or negative – the way we have inflation and deflation. And the way Inflation is used to reduce the Nominal GDP to derive the Real GDP – similarly this Environmental index should be given its due weightage and Nominal GDP should be adjusted to arrive at the real GDP.

There are countries which have increased forest cover, but surprisingly such work doesn’t reflect in their GDP. At the same time, there are few Nations which have mindlessly exploited mother earth and might have added numbers to their GDP – but turned out to taxing on the World environment. Shouldn’t, therefore World Bodies sit back and rethink on introducing proper indexes to give a better meaning to this term Real GDP. This number decides the country’s ranking in world order. It decides the currency values and defines the World trade. Shouldn’t the World Bodies be little serious on this index then?

Developing & Underdeveloped nations might cry foul stating that this might impede their growth which is true. Such countries can be taxed with a reduced multiple of this “Environmental index” damage from their nominal GDP till they don’t become developed. And then can we say – we are sitting on right set of numbers that could be compared.

GDP – Gross Domestic Product, seems to be making lot of headlines in the media lately. It turns out that, this term has become the toast of political discussions and almost all the channels are debating relentlessly on who performed well on this matrix – was it #UPA or the present #NDA Govt. Never thought, that politicians will take over this term and use (misuse) it to slugfest each other without knowing the real meaning of this term. Leave aside these politicians, even the best #Economists sometimes suffer myopicism in analyzing GDP. I haven’t found anything ingenious – but Yeah! Surely something interesting to deliberate.

Let us first understand the basic meaning of Nominal GDP. It is a macroeconomic measure derived by adding all the monetary value of economic produce in an economy for a period between two points on the time-scale. This figure is adjusted for price changes (i.e., inflation or deflation) to arrive at the Real GDP number – reported commonly as #GDP. Inflation is the changes in prices in the period over same points on the time-scale.

Now, that we have understood how Inflation is a necessary ingredient to calculate Real GDP number, let me introduce another important term which, incidentally is known to the World leaders & thinkers, but very conveniently overlooked. But before that, let me take a tangent to understand this famous scientific Law – “The Law of conservation” . This law states that, Nothing in this universe gets created or destroyed – it simply changes forms. Should I infer that all this “GDP” that Nations chase, is nothing but converting one form (of natural resources) into another form (usable resource)? Oh yes! Does that mean, we as constituents of the economy are Converting things and not Producing them contrary to what we commonly thought? Yes again..!

If I were to pull a “Scientist” to explain the term GDP in the light of this famous law – the explanation would say that it should defined as the “Gross Conversion Ratio” rather than a production ratio. Now assume, we also have An Environmentalists on the panel. S/He would suggest that all this Conversion is happening at an environment cost. So before one calculates the “Real GDP” – please account for this cost also. How to measure this cost? Well simple, it could be measured by creating few yardsticks like Carbon foot-prints, green-house gasses, air quality etc. Differences in values between two set of points(same points as GDP calculation) on the time-scale be accounted for. This number could be positive or negative – the way we have inflation and deflation. And the way Inflation is used to reduce the Nominal GDP to derive the Real GDP – similarly this Environmental index should be given its due weightage and Nominal GDP should be adjusted to arrive at the real GDP.

There are countries which have increased forest cover, but surprisingly such work doesn’t reflect in their GDP. At the same time, there are few Nations which have mindlessly exploited mother earth and might have added numbers to their GDP – but turned out to taxing on the World environment. Shouldn’t, therefore World Bodies sit back and rethink on introducing proper indexes to give a better meaning to this term Real GDP. This number decides the country’s ranking in world order. It decides the currency values and defines the World trade. Shouldn’t the World Bodies be little serious on this index then?

Developing & Underdeveloped nations might cry foul stating that this might impede their growth which is true. Such countries can be taxed with a reduced multiple of this “Environmental index” damage from their nominal GDP till they don’t become developed. And then can we say – we are sitting on right set of numbers that could be compared.